Why startups aren’t guaranteed to own the future

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A lot of commentary on innovation and disruption has assumed that startups own the future. Compared to corporate giants, startups are nimble and agile, and such a “startup culture” is necessary for the creation of breakthrough products and services. Recent history seems to bear this out.

We have seen several large companies such as Blockbuster replaced by upstarts like Netflix. Indeed, the rise of companies like Dropbox, Airbnb, and Uber has been phenomenal. But is it really inevitable that startups own the future of business?

History begs to differ

Since the arc of history is long, it might be useful to look further past the last two decades. Most of the major technologies we use today were developed in the R&D labs of large corporations such as Xerox’s PARC and AT&T’s Bell Labs. This trend continues today, with over 90 percent of the top 20 global R&D spend happening in large companies such as Amazon, Intel, Ford, Johnson & Johnson, Cisco, and Roche.

Of course, this R&D spend still needs to be combined with viable business models in order to achieve commercial success. But this is not a one-way street. R&D is still a key ingredient in the innovation formula. Without breakthrough technologies, well-designed business models cannot succeed.

What most startups have been doing over the last two decades is leveraging large companies’ existing technologies and applying great business models to them (e.g. Uber, Airbnb, and Pinterest). This was largely because companies like Xerox fumbled the opportunity to benefit from their own technologies. Startups also need to work this way because they don’t have the financial muscle to build a great R&D function. In contrast, large companies usually have the resources they need to do great R&D.

The third wave

This capacity to invest in R&D puts large companies at an advantage. We are now entering a new age of technology and the internet. In his latest book, The Third Wave, Steve Case identifies three waves of internet technologies:

Wave 1  (1985-1999)

Companies like Cisco, IBM, AOL, and others were building the necessary underlying technologies for the internet. Their work mostly involved laying the foundations of the online world that we have today.

Wave 2 (2000-2015)

This is where the app economy and mobile revolution took hold. Companies like Amazon, Google, Facebook, Twitter, and others were able to leverage the foundations built in the first wave to create great products and services.

Wave 3 (2016-)

The internet will be fully integrated into everything we do and every product we use. The ubiquitous connectivity that innovators will be able to leverage will impact economic sectors that were hitherto only marginally affected by the technology revolution, such as healthcare, education, transportation, and food production.

A key factor is that the first wave needed a lot of financial investment in R&D and infrastructure building. There was also a need for companies to discuss with governments in order to enact key policy changes. This type of innovation required deep pockets and vast resources. This is why large companies and venture capital dominated this era.

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